The ceiling on the US Federal Debt has been reached once again, after Congress suspended it in 2019 for two years. The deal expired on August 1, 2021. Since then, the US Treasury has been managing cash through “extraordinary measures,” shuffling money around between accounts, so it can continue operating. They are hoping to raise it yet again. If it is not, either most government obligations will go unpaid, or Congress would have to enact legislation to repeal already-approved spending. In this scenario, the US government would have to behave like any other household or corporation, to start living within its means.
The politics behind whether Congress should raise the debt ceiling or not are beyond the scope of this post. Suffice it to say that there is plenty of blame for everyone in government for having allowed this situation to fester as long as it has. Nobody in government, in either party, has even tried to slow spending growth since the 1990’s.
The drama around the process and next steps is now escalating. Those in charge of the government say that reaching the debt ceiling could cause a recession, induce cuts to city and state funding, and lead to defaults on government debt. Others say that holding the line is necessary to prevent our country from becoming enslaved by its debt.
There are very real risks for investors, near-term and long-term, regardless of how this situation is resolved. On the one hand, a complete stop to deficit spending would mean committed monies will not be spent. Programs would have to be eliminated. On the other hand, if the debt ceiling is raised, or even permanently eliminated, most observers worry that future interest rates would rise, and future interest payments would swamp the federal budget. Rising interest rates put downward pressure on all asset prices, including stocks and real estate.
The federal government was borrowing a trillion dollars per year until 2020, when it borrowed more than $3 trillion. Amazingly, “mandatory” spending in 2020 exceeded revenues by $1.2 trillion. This level of annual deficit is forecasted by the Congressional Budget Office (CBO) to return to its prior share of GDP (about 22%) for the next few years, and then increase steadily through the mid-century. No dollar forecasts are even reported by the CBO.
To illustrate the seriousness of all this, to balance the budget, the following programs would have to be entirely eliminated:
- Social Security
- Medicare
- Medicaid
- Defense
- Interest on debt
Even worse, the current taxes on Social Security and Medicare would need to continue, or more cuts would be needed!
Nobody, including me, is seriously proposing all those programs be eliminated. The above is only an illustration. It is not an understatement to observe that the past two years have proven catastrophic; and a look at the 2019 forecast would show a much brighter picture than the one today. Who knows what rainy days may lie just ahead?
Another way to “fix” the budget would be to increase tax revenues somehow. The present tax calculation could be done, and then a 100% surcharge added for each taxpayer. Remember, this is not to PAY OFF the national debt, it is simply to stop incurring more debt.
To pay off the national debt would even take more: this would mean an assessment of $86,210 per citizen. For a family of four, this would be $344,840.
Obviously, none of the alternatives above is going to be pleasant. Balancing the budget and paying down the debt may not be necessary, but an unlimited increase is not required.
This also, obviously, cannot go on forever.
Everybody is hoping this will be someone else’s problem. Someday – maybe sooner than we think – it will be “our” problem.